Pension freedoms have cost too many people their life savings and a clampdown on rogues is long overdue

That makes them prey to a whole industry of people selling high risk investments such as minibonds, holiday apartments, or, in John and Julian’s case, highly speculative property schemes in the Caribbean.

The Financial Conduct Authority recently investigated the paperwork of British Steel workers who’d been advised to switch out of their company schemes. They found only a fifth had been correctly advised to move.

It is currently probing 30 companies over similar dangerous advice.

One such was the company that put John, Julian and Dave into their duff investments.

It’s called LJ Financial Planning. And the careless – perhaps unscrupulous - way the FCA says it behaved goes a long way to explaining why pension mis-selling is such an almighty problem in the UK.

It also highlights fundamental problems with the way the modern pensions industry works.

LJ Financial Planning is a chartered independent financial adviser. That means not only is it regulated by the Financial Conduct Authority, but it holds the charter – supposedly the gold standard of British financial advice.

That did not stop it helping 114 customers, including our trio of case studies, to move their pensions into SIPPs so they could back, to quote the FCA “often high-risk, esoteric and illiquid” investments. This involved £6 million of ordinary people’s savings, resulting in fees for the firm of nearly £170,000, the regulator says.

LJ took no heed of the customers’ personal circumstances or the dubious investments they were making, pushing through the moves even though it was aware of their potential high risk. 

As one senior employee told one of the firm’s compliance partners, it didn’t “want to know” where the money was going. Even when it saw one of the introducers was suggesting clients put their pensions into land purchases in the Cayman Islands.

As Mark Steward, executive director of enforcement and market oversight puts it: “In many instances, these investments are now worthless and many investors are approaching or already in retirement. So they are especially vulnerable to the risk of significant losses.”

LJ was wrong to turn a blind eye to these investments and was sanctioned and fined by the FCA last week. It has also paid more than £2.5 million in compensation to affected customers so far.

But how did the clients get pulled in to such schemes in the first place? After all, it was the customers who asked LJ to move them into SIPPs, not the other way around.  

The blame here lies with a number of “unauthorised introducers”. These are totally unregulated people, often with dubious track records in the financial services industry, who help raise funds for dubious investment schemes. 

Some schemes are high risk. Others are outright scams and Ponzi schemes (there is no suggestion of such wrongdoing by the FCA in the LJ case).

Introducers’ fees can be eyewatering – 20% or more – but investors rarely get to know about them. They only tend to find out when they realise their investment is plunging.

The advisers prey on unsophisticated people like Julian, John and Dave with slick sales patter, persuading them of the high interest delights of everything from Malaysian palm oil plantations to car park investments in Dubai.  

Sometimes such “alternative investments” might pay off. More likely, the money will be eaten up in fees and poor performance.

But the introducers cannot work on their own. They can only winkle customers’ money out of their work pension if the client has a SIPP. And only a regulated adviser, authorised by the FCA to hold “transfer permissions”, is allowed to transfer a saver’s occupational pension into one.

The FCA report gave the unauthorised introducers in the LJ case anonymity so we don’t know much about them. 

Nor did LJ, by the looks of it. 

The FCA said that it failed to check out either the introducers or the underlying investments.

This is why it got in so much trouble. Because under the FCA rules, it should have properly considered whether a SIPP was the right route for each individual client’s personal circumstances, and whether the investments in it were suitable.

The case highlights many questions about our broken pension system, and offers clues as to how we could stop the tidalwave of pensions transfer victims now coming to light.

1) Weak punishments 

Clearly, LJ was a rotten apple. Had it done its duty and looked into the cases in more detail, it would have stopped the investments happening. Yet the FCA has allowed the firm to continue trading after fining it a mere £107,200. It has paid compensation, but none of its allegedly errant advisers have been named and shamed. For a scheme that saw it turn a blind eye to more than £6 million of investments, that seems scant discouragement. Surely the punishments should be bigger when so many people have been put through such distress, worry and financial loss? Even when firms compensate the unfortunate victims, the sums rarely put them fully back to the position they would have been in had they not opted out of their occupational scheme.

2) Rogue introducers 

Why are unauthorised introducers allowed to roam the country with no qualifications or duty of care, hunting for gullible members of the public for their dubious schemes? Why can’t everybody involved in the public’s investment choices not be regulated by the FCA?

3) Lazy trustees

What were the trustees of these people’s workplace pensions doing while all this was happening? They have a duty of care to those whose pensions they are responsible for. While it’s true that they’re not allowed by law to stop members transferring out, they should educate them clearly on the risks of doing so, paying personal attention to those applying rather than just sending out a blanket email warning. They should also do more to capture data on where members are moving their savings to, sharing it with the FCA and pension regulators so authorities can spot suspiciously aggressive investment marketing quickly and investigate. Trustees are currently asked to pledge to the principles of the Pension Scams Industry Group Code of Good Practice, but that’s clearly not good enough.

4) Kamikaze investments 

Why can’t we explore a system where investments cannot be targeted at the public’s pension savings unless they have been authorised as having a tolerable level of risk associated? Authorised investment funds exist already in the UK and the EU but the public can still be targeted with barmy, unauthorised and doomed-to-fail projects with sky high fees. As Alistair Cunningham of Wingate Financial Planning points out, if the only way a fund manager can raise money is through an unauthorised scheme targeted at gullible retail investors, that tells you a lot about the risks involved.

5) Too much freedom

Given that transferring out of a defined benefit pension is almost always the wrong move, the FCA should consider banning such transfers altogether. For the small percentage of cases where they may be beneficial – mainly the very ill with not long to live – there could be an exception. When pension freedoms were granted, civil service pensions were not included. Perhaps that tells us something about what the powers-that-be thought about the idea.

Harrowing stories like those of John, Julian and Dave have become legion since pension freedoms came in.  

While well-intentioned and successful in many ways, the rules have also turned into a rogues’ charter, spawning hundreds of dubious investments where the only realistic outcome is the enrichment of those who devise and sell them.

The public must be more clearly taught that it is barely ever a good idea to transfer out of a workplace pension scheme.  

In the meantime, let’s tighten up the system to make it safer for those who ignore that advice.